Ambiguity, Information Quality, and Asset Pricing

ABSTRACT

When ambiguity‐averse investors process news of uncertain quality, they act as if they take a worst‐case assessment of quality.
As a result, they react more strongly to bad news than to good news. They also dislike assets for which information quality
is poor, especially when the underlying fundamentals are volatile. These effects induce ambiguity premia that depend on idiosyncratic
risk in fundamentals as well as skewness in returns. Moreover, shocks to information quality can have persistent negative
effects on prices even if fundamentals do not change.